UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _________________ to ___________________
Commission File Number 1-5366
EASTERN UTILITIES ASSOCIATES
(Exact name of registrant as specified in its charter)
Massachusetts 04-1271872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Liberty Square, Boston, Massachusetts
(Address of principal executive offices)
02109
(Zip Code)
(617)357-9590
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes...X.......No..........
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class Outstanding at October 31, 1996
Common Shares, $5 par value 20,435,997 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
September 30, December 31,
ASSETS 1996 1995
Utility Plant and Other Investments:
Utility Plant in Service $ 1,048,216 $ 1,037,662
Less: Accumulated Provision for Depreciation
and Amortization 347,865 324,146
Net Utility Plant in Service 700,351 713,516
Construction Work in Progress 20,504 7,570
Net Utility Plant 720,855 721,086
Investments in Jointly Owned Companies 71,638 70,210
Non-Utility Plant - Net 78,750 82,347
Total Plant and Other Investments 871,243 873,643
Current Assets:
Cash and Temporary Cash Investments 6,566 4,060
Accounts Receivable, Net 83,093 84,376
Notes Receivable 26,446 18,663
Fuel, Materials and Supplies 14,338 16,516
Other Current Assets 8,880 11,804
Total Current Assets 139,323 135,419
Deferred Debits and Other Non-Current Assets 191,542 197,068
Total Assets $ 1,202,108 $ 1,206,130
LIABILITIES AND CAPITALIZATION
Capitalization:
Common Shares, $5 Par Value $ 102,180 $ 102,184
Other Paid-In Capital 221,101 220,730
Common Share Expense (3,926) (3,913)
Retained Earnings 53,298 56,228
Total Common Equity 372,653 375,229
Non-Redeemable Preferred Stock - Net 6,900 6,900
Redeemable Preferred Stock - Net 26,928 26,255
Long-Term Debt - Net 423,373 434,871
Total Capitalization 829,854 843,255
Current Liabilities:
Long-Term Debt Due Within One Year 12,511 19,506
Notes Payable 52,571 39,540
Preferred Stock Sinking Fund 50 50
Accounts Payable 29,442 35,769
Taxes Accrued 6,225 4,544
Interest Accrued 7,166 10,861
Other Current Liabilities 32,003 19,931
Total Current Liabilities 139,968 130,201
Deferred Credits and Other Non-Current Liabilities 91,288 91,934
Accumulated Deferred Taxes 140,998 140,740
Total Liabilities and Capitalization $ 1,202,108 $ 1,206,130
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands Except Number of Shares and Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Operating Revenues $ 131,076 $ 143,333 $ 388,661 $ 428,036
Operating Expenses:
Fuel 25,904 24,973 66,563 70,900
Purchased Power 27,391 30,577 86,007 94,032
Other Operation and Maintenance 44,090 44,199 134,031 139,456
Voluntary Retirement Incentive 0 0 4,505
Depreciation and Amortization 11,240 11,055 34,038 34,553
Taxes - Other than Income 5,807 5,001 18,216 16,043
Income Taxes - Current 2,113 5,097 8,915 9,171
- Deferred (Credit) 1,203 1,804 (742) 4,921
Total 117,748 122,706 347,028 373,581
Operating Income 13,328 20,627 41,633 54,455
Other Income - Net 5,800 4,119 12,200 11,235
Loss on Disposal of Cogeneration
Operations (18,086) (18,086)
Income Tax Impact of Loss on Disposal
Of Cogeneration Operations 7,588 7,588
Income Before Interest Charges 19,128 14,248 53,833 55,192
Interest Charges:
Interest on Long-Term Debt 8,438 9,593 25,707 28,911
Other Interest Expense 1,773 1,590 4,969 4,320
Allowance for Borrowed Funds Used
During Construction (Credit) (472) (601) (1,457) (1,997)
Net Interest Charges 9,739 10,582 29,219 31,234
Net Income 9,389 3,666 24,614 23,958
Preferred Dividends of Subsidiaries 578 582 1,735 1,743
Consolidated Net Earnings $ 8,811 $ 3,084 $ 22,879 $ 22,215
Weighted Average Number of
Common Shares Outstanding 20,435,997 20,336,703 20,436,290 20,183,205
Consolidated Earnings Per
Average Common Share $ 0.43 $ 0.15 $ 1.12 $ 1.10
Dividends Paid $ 0.415 $ 0.40 $ 1.23 $ 1.185
See accompanying notes to consolidated condensed financial statements.
EASTERN UTILITIES ASSOCIATES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
1996 1995
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 24,614 $ 23,958
Adjustments to Reconcile Net Income
to Net Cash Provided from Operating Activities:
Depreciation and Amortization 38,821 42,799
Deferred Taxes (333) (1,884)
Non-cash (Gains)/Expenses on Sales of Investments
in Energy Savings Projects 3,184 (2,232)
Loss on Disposition of Cogeneration Projects 18,086
Investment Tax Credit, Net (905) (909)
Allowance for Funds Used During Construction (254) (471)
Collections and sales of project notes and leases receivable 5,891 16,312
Other - Net 6,793 6,873
Change in Operating Assets and Liabilities 7,610 (19,430
Net Cash Provided From Operating Activities 85,421 83,102
CASH FLOW FROM INVESTING ACTIVITIES:
Construction Expenditures (49,662) (63,574
Collections on Notes and Lease Receivables of EUA Cogenex 3,198 2,392
Proceeds from Disposal of Cogeneration Assets 11,501
Increase in Other Investments (4,036)
Net Cash (Used in) Investment Activities (50,500) (49,681
CASH FLOW FROM FINANCING ACTIVITIES:
Issuances:
Common Stock 4,520
Redemptions:
Long-Term Debt (18,560) (5,664)
Premium on Reacquisition and Financing Expenses (14) (60)
EUA Common Share Dividends Paid (25,137) (23,899
Subsidiary Preferred Dividends Paid (1,735) (1,742)
Net Increase (Decrease) in Short-Term Debt 13,031 (3,018)
Net Cash (Used in) Financing Activities (32,415) (29,863
Net Increase in Cash and Temporary Cash Investments 2,506 3,558
Cash and Temporary Cash Investments at Beginning of Period 4,060 20,109
Cash and Temporary Cash Investments at End of Period $ 6,566 $ 23,667
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (Net of Capitalized Interest) $ 31,717 $ 30,096
Income Taxes $ 11,490 $ 6,596
Supplemental schedule of non-cash investing activities:
Conversion of Investments in Energy Savings
Projects to Notes and Leases Receivable $ 4,813 $ 14,158
See accompanying notes to consolidated condensed financial statements.
EASTERN UTILITIES ASSOCIATES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying Notes should be read in conjunction with the
Notes to Consolidated Financial Statements incorporated in the
Eastern Utilities Associates (EUA or the Company) 1995 Annual
Report on Form 10-K and the Company's Quarterly Report on
Form 10-Q for the periods ended March 31, and June 30, 1996.
Note A - In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring
accruals) necessary to present fairly its financial
position as of September 30, 1996 and December 31, 1995,
and the results of operations for the three and nine
months ended September 30, 1996 and 1995 and cash flows
for the nine months ended September 30, 1996 and 1995.
Certain reclassifications have been made to prior period
financial statements to conform to current period
classifications.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EUA occasionally makes projections of expected future
performance or statements of its plans, objectives and
new business opportunities which are forward-looking
statements under federal securities law. Actual results
could differ materially from those discussed and there
can be no assurance that such estimates of future results
could be achieved.
Note B - Results shown above for the respective interim periods
are not necessarily indicative of results to be expected
for the fiscal years due to seasonal factors which are
inherent in electric utilities in New England. A greater
proportionate amount of revenues is earned in the first
and fourth quarters (winter season) of most years because
more electricity is sold due to weather conditions, fewer
day-light hours, etc.
Note C - Commitments and Contingencies:
Recent Nuclear Regulatory Commission (NRC) Actions
Millstone III:
Montaup Electric Company (Montaup), the wholesale
generation subsidiary of Eastern Edison, a wholly owned
subsidiary of EUA, has a 4.01% ownership interest in
Millstone III, an 1154-MW nuclear unit that is jointly
owned by a number of New England utilities, including
subsidiaries of Northeast Utilities (Northeast).
Northeast is the lead participant in Millstone III, and
on March 30, 1996, Northeast determined to shut down the
unit following an engineering evaluation which determined
that four safety-related valves would not be able to
perform their design function during certain postulated
events.
The NRC has raised issues with respect to Millstone III
and certain of the other nuclear units in which Northeast
and its subsidiaries, either individually or collectively,
have the largest ownership shares, including a 582-MW
Nuclear unit owned by Connecticut Yankee Atomic Power
Company (Connecticut Yankee), in which Montaup has 4.5%
ownership share (see "Connecticut Yankee" Below).
In July 1996 Northeast reported that it has been
responding to a series of requests from the NRC seeking
assurance that the Millstone III unit will be operated in
accordance with the terms of its operating license and
other NRC requirements and regulations and dealing with a
series of issues that Northeast has identified in the
course of these reviews. Providing these assurances and
addressing these issues will be components of an
Operational Readiness Plan (ORP) to be developed for the
Millstone III unit. The ORP for Millstone III was
submitted to the NRC on July 2, 1996 and is presently
being implemented.
On October 18 1996, the NRC informed Northeast that it
will establish a Special Projects Office to oversee
inspection and licensing activities at Millstone. The
Special Projects Office will be responsible for (1)
licensing and inspection activities at Northeast's
Connecticut plants, (2) oversight of an independent
corrective action verification program; (3) oversight of
Northeast's corrective actions related to safety issues
involving employee concerns, and (4) inspections
necessary to implement NRC oversight of the plants'
restart activities.
On October 24, 1996 the NRC issued another order
directing that prior to restart of Millstone III,
Northeast submit a plan for disposition of safety issues
raised by employees and retain an independent third-party
to oversee implementation of this plan. This third-party
oversight will continue until the situation is corrected.
There is no estimate of how long this will take.
Northeast Management has indicated it cannot presently
estimate the effect these efforts will have on the timing
of restarts or what additional costs, if any, these
developments may cause.
The most recent Northeast estimate of incremental
costs related to the outage of Millstone III is
approximately $68.0 million through December 1996.
Montaup's share is $2.7 million, $1.7 million of which
has been incurred through September.
While Millstone III is out of service, Montaup will
incur incremental replacement power costs estimated at
$0.4 million to $0.8 million per month. Montaup bills
its replacement power costs through its fuel adjustment
clause, a wholesale tariff jurisdictional to the Federal
Energy Regulatory Commission (FERC). However, there is
no comparable clause in Montaup's FERC-approved rates
which at this time would permit Montaup to recover its
share of the incremental costs incurred by Northeast.
EUA cannot predict the ultimate outcome of the NRC
inquiries or the impact which they may have on Montaup
and the EUA system. Montaup is also evaluating its
rights and obligations under the various agreements
relating to the ownership and operation of Millstone III.
Connecticut Yankee:
The Connecticut Yankee Nuclear Unit was taken off-line
in July 1996 because of issues related to certain
containment air recirculation and service water systems.
In October, Montaup, as one of the joint owners,
participated in an economic evaluation of Connecticut
Yankee which recommended permanently closing the unit and
replacing its output with less expensive energy sources.
As a result of the analysis, work at the plant has slowed
pending a final board decision, expected to occur in the
fourth quarter of 1996. The preliminary estimate of the
sum of future payments for the closing, decommissioning,
and recovery of the remaining investment in Connecticut
Yankee, assuming permanent shut down, is approximately
$797 million. Montaup's share of the total estimated
costs is $35.9 million. Montaup anticipates being able
to fully recover its remaining investment and
decommissioning costs in Connecticut Yankee, in which
event there would be no adverse impact on earnings.
Maine Yankee:
On June 7, 1996, the NRC commissioned an independent
Safety Assessment Team to assess the conformance of the
Maine Yankee Atomic Power Station to its design and
licensing basis. Montaup holds a 3.5% ownership interest
in the Maine Yankee Unit.
On October 7, 1996, the NRC released an Independent
Safety Assessment (ISA) report. In evaluating the
Plant's conformance to its licensing basis, the report
concluded that Maine Yankee was in general conformance
with its licensing basis although significant items of
nonconformance were identified stemming from two closely
related root causes: (1) economic pressure to be a low-cost
energy provider had limited available resources to address
corrective actions and some improvements and (2) a questioning
culture was lacking, which had resulted in a failure to identify
or promptly correct significant problems in areas perceived by
Maine Yankee to be of low safety significance.
A letter to Maine Yankee from the Chair of the NRC, accompanying
the ISA report directed Maine Yankee to provide to the NRC its
plans for addressing the root causes of the deficiencies
identified by the ISA.
The Plant's current allowed operating level may be
limited to 90% of capacity until completion of the Plant's next
planned refueling outage, which is now scheduled for September
1997. Maine Yankee cannot predict, however, whether or when the
Plant will attain a 100-percent operating level, or the results
of the ongoing investigations and reviews.
General:
Recent actions by the NRC, some of which are cited above,
indicate that the NRC has become more critical and active
in its oversight of nuclear power plants.
EUA is unable to predict at this time, what, if any,
ramifications these NRC actions will have on any of the
other nuclear power plants in which Montaup has an
ownership interest or power contract.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is Management's discussion and analysis of
certain significant factors affecting the Company's earnings and
financial condition for the interim periods presented in this Form
10-Q.
Overview
Consolidated Net Earnings for the quarter ended September 30,
1996 were $8.8 million compared to $3.1 million in the third
quarter of 1995. The third quarter 1995 earnings include a one-time
after-tax charge of $10.5 million, related to the loss on
discontinuance of cogeneration operations by EUA Cogenex
Corporation (EUA Cogenex), EUA's wholly owned energy services
subsidiary. Net Earnings contributions by Business Unit for the
third quarter of 1996 and 1995 were as follows (000's):
Increase
1996 1995 (Decrease)
Core Electric Business $9,915 $12,593 $(2,678)
Energy Related Business* (899) 976 (1,875)
Corporate (205) 13 (218)
Subtotal 8,811 13,582 (4,771)
Cogeneration Discontinuance (10,498) 10,498
Consolidated $8,811 $ 3,084 $ 5,727
======= ======== ========
*Excluding the 1995 EUA Cogenex discontinuance of cogeneration operations.
Consolidated Net Earnings for the nine months ended September
30, 1996 were $22.9 million compared to $22.2 million for the same
period of 1995. The year-to-date 1996 earnings include a one-time,
after-tax charge to earnings of $3.7 million recorded by EUA
Cogenex in June 1996. The year-to-date 1995 earnings include a
$2.7 million, after-tax charge recorded in June 1995 for a
voluntary retirement incentive offer as well as the charge for the
1995 discontinuance of cogeneration operations. Net Earnings
contributions by Business Unit for the first nine
months of 1996 and 1995 were as follows (000's):
Increase
1996 1995 (Decrease)
Core Electric Business* $28,528 $32,297 $(3,769)
Energy Related Business** (1,318) 2,948 (4,266)
Corporate (659) 215 (874)
Subtotal 26,551 35,460 (8,909)
Voluntary Retirement Incentive (2,747) 2,747
Cogeneration Discontinuance (10,498) 10,498
June 1996 EUA Cogenex charge (3,672) (3,672)
Consolidated $22,879 $22,215 $ 664
======= ======= ========
*Excluding the 1995 VRI charge.
**Excluding the 1995 EUA Cogenex discontinuance of cogeneration
operations and the June 1996 EUA Cogenex charge.
Core Electric Business: The earnings contribution of this
Business Unit, net of the 1995 VRI charge, decreased in both the
third quarter and year-to-date periods of 1996. These decreases
are primarily the result of expenses related to an unusual number
of severe storms which struck our retail service territory in the
first nine months of this year, increases in property tax and
legal expenses, outage costs of the Millstone III Nuclear
Generating Station (in which we are a 4.01% joint owner) and, for
the third quarter, a decrease in kilowatthour sales. Offsetting
these negative impacts, somewhat, was lower interest expense
resulting from maturing debt issues in 1995.
Energy-Related Business: Net of the one-time charges listed in the
preceding table, EUA Cogenex incurred losses of $0.9 million and
$1.6 million, respectively, in the three and nine month periods
ended September 30, 1996, a decrease of $1.5 million and $4.1
million, respectively, from its earnings contributions in the same
periods of a year ago. The virtual elimination of utility
sponsored DSM programs and difficulties in closing project
proposals have negatively impacted EUA Cogenex results. Refocusing
of the Cogenex sales efforts are not expected to have a positive
impact on Cogenex results until the latter part of 1997.
Year-to-date losses generated by EUA Energy Investment
Corporation decreased slightly in comparison with the first nine
months of 1995. However, the TransCapacity Limited Partnership
and the BIOTEN partnership have progressed more slowly than
expected. TransCapacity L.P. customer installations continue to
be slower than anticipated while testing of BIOTEN's prototype
biomass-fueled generating unit, though very encouraging to date,
has taken longer than anticipated.
Corporate: The change in earnings of the Corporate business unit
is primarily a result of increased short-term debt interest
expense in 1996.
Operating Revenues
Operating Revenues for the third quarter of 1996 decreased by
approximately $12.3 million when compared to the same period of
1995. Revenues by Business Unit operations were as follows
(000's):
Three Months Ended September 30,
Increase
1996 1995 (Decrease)
Core Electric Business $118,211 $124,568 $ (6,357)
Energy Related Business 12,865 18,765 (5,900)
Corporate 0 0 0
Consolidated $131,076 $143,333 $(12,257)
======== ======== =========
The change in Core Electric Business revenues reflects
recoveries of decreased purchased power and conservation and load
management (C&LM) expenses and the negative impact of a 2.5% kWh
sales decrease, slightly offset by recoveries of increased fuel
expense. (see Operations Expense below).
EUA Cogenex revenues, which account for virtually all of the
Energy Related Business Unit revenues, decreased by $5.9 million
in this year's third quarter compared to the same period of 1995.
This decrease was due primarily to lower project sales of
approximately $5.4 million, decreased EUA Nova revenues of $1.6
million offset by increased revenues of EUA Highland.
Operating Revenues for the first nine months of 1996 decreased
by $39.4 million or 9.2% when compared to the same period of 1995.
Operating Revenues by Business Unit for the first nine months of
1996 and 1995 were as follows (000's):
Nine Months Ended September 30,
Increase
1996 1995 (Decrease)
Core Electric Business $347,746 $366,523 $(18,777)
Energy Related Business 40,915 61,513 (20,598)
Corporate 0 0 0
Consolidated $388,661 $428,036 (39,375)
======== ======== =======
Core Electric Business revenues decreased by $18.8 million due
primarily to lower purchased power, fuel and C&LM expense
recoveries aggregating $18.1 million and a decrease in other
operating revenues of approximately $2.0 million. These decreases
were offset somewhat by a 1.2% increase in kWh sales.
EUA Cogenex revenues decreased by $20.6 million due primarily
to lower project sales of approximately $14.2 million, lower
cogeneration revenues of approximately $5.5 million related to the
September 1995 discontinuation of cogeneration operations and
decreased EUA Nova revenues of $6.1 million. These decreases were
offset somewhat by the increased revenues aggregating $5.0 million
from EUA Highland, EUA Citizens and EUA Day.
KWH Sales
Primary kWh sales of electricity by EUA's Core Electric
Business Unit decreased by 2.5% in the third quarter of 1996
compared to the same period last year due to significantly milder
weather. This decrease was led by decreases of 4.2% and 3.3% in
the residential and commercial customer classes, which are
typically more weather sensitive. Year-to-date September 30, 1996
sales of electricity increased 1.2% compared to the same period of
1995. The first and second quarter increases were mitigated by
the third quarter's disappointing results.
Operations Expense
Fuel expense of the Core Electric Business increased by
approximately $900,000 or 3.7% for the third quarter and decreased
by $4.3 million or 6.1% for the year-to-date periods of 1996,
respectively, as compared to the same periods of 1995. The third
quarter change was impacted by a 4.2% increase in total energy
generated and purchased, partially offset by 2.4% decrease in the
average cost of fuel. Because the EUA System requirements
decreased in the third quarter, sales to the New England Power
Pool (NEPOOL) increased. These NEPOOL sales recover fuel costs
only and have little earnings impact. The year-to-date period was
impacted by a 9.5% decrease in the average cost of fuel offset by
a 3.3% increase in total energy generated and purchased.
Purchased Power demand expense for the third quarter of 1996
decreased $3.2 million or 10.4% and $8.0 million or 8.5% for the
nine months ended September 30, 1996. The third quarter change
was primarily due to the impact of a prior period refund of
approximately $2.0 million from the Pilgrim Nuclear unit,
subsequently refunded to retail customers, and decreased billings
from the Ocean State Power Project, offset somewhat by increased
billings of the Yankee nuclear units. The year-to-date decrease
is due primarily to the impact of lower billings of approximately
$3.9 million from the Pilgrim nuclear unit, including the
previously mentioned refund, and decreased billings from the Ocean
State Power Project and the Yankee nuclear units aggregating $3.1
million.
Other Operation and Maintenance expenses for the third quarter
were virtually flat and decreased by $5.4 million for the nine
months ended September 30, 1996 compared to the same periods in
1995.
Direct expenses of the Core and Corporate Business units
increased by $1.7 million and $3.4 million in the third quarter
and year-to-date periods of 1996, respectively, as compared to the
same periods of a year ago. These changes are due primarily to
incremental storm expenses, costs related to the electric industry
restructuring activities and increased assessments by FERC
aggregating $1.6 million and $3.6 million for the respective
periods.
Indirect expenses, items over which there is limited short-term
control or items which are fully recovered in rates,
increased by $0.7 million and decreased by $1.5 million in the
third quarter and year-to-date periods of 1996, respectively, as
compared to the same periods of 1995. The third quarter change
was due to increased FAS106 expense of $0.8 million and increased
jointly owned unit expenses of $1.4 million. Offsetting these
increases somewhat was a decrease in C&LM expenses of $1.2
million. The year-to-date decrease includes $4.5 million of lower
C&LM expenses somewhat offset by increased legal & FAS106 expenses
aggregating $3.3 million.
Expenses of the Energy Related Business unit decreased by $2.6
million and $7.2 million for the third quarter and year-to-date
periods of 1996, respectively. The third quarter decrease was due
primarily to decreased EUA Cogenex project sales related expenses
of $4.5 million and decreased EUA Nova costs of goods sold of $1.0
million offset somewhat by increased expenses of EUA Highland and
EUA Citizens aggregating $3.0 million. The year-to-date change
included decreases in EUA Cogenex sales related expenses of $8.4
million, decreased EUA Nova costs of goods sold of $4.4 million
and decreased cogeneration related expenses of $4.6 million,
related to the September 1995 discontinuation of that business
line. EUA Energy Investment Corporation expenses decreased by
$1.2 million in the year-to-date period. These year-to-date
decreases were offset somewhat by the June 1996 EUA Cogenex charge
of $5.9 million and $5.7 million of increased expenses related EUA
Highland and EUA Citizens.
Taxes Other Than Income
Taxes other than income increased approximately $800,000 and
$2.2 million in the three month and year-to-date periods ended
September 30, 1996, respectively, compared to the same periods of
1995. The reversal of previously over-accrued property taxes in
the second and third quarters of 1995 and lower Rhode Island gross
receipts taxes, related to a lower rate and lower revenues were
primarily responsible for these changes.
Income Taxes
The effective income tax rate for the first nine months of
1996 increased to 35.2% from 30.2% for the same period of 1995 due
mainly to a decrease in state income tax benefits.
Other Income (Deductions) - Net
Other Income and (Deductions)-Net increased $1.7 million for
the third quarter and $1.0 million for the year-to-date period as
compared to the same periods of 1995. Approximately $1.7 million
of these increases is due to the sale of Seabrook II equipment
jointly owned by Montaup. The year to date increase was partially
offset by the impact of the write-off of Cogenex's AYP Capital and
Westar joint venture start-up costs, included in the June 1996
$5.9 million charge.
Interest Charges
Net interest charges for the third quarter and nine months
ended September 30, 1996 decreased approximately $800,000 and $2.0
million respectively, as compared to the same periods of 1995.
These decreases were primarily due to the December 1995 maturity
of $25 million of 9-9 1/4% Unsecured Medium Term Notes and $10
million of 8.9% First Mortgage and Collateral Trust Bonds of
Eastern Edison Company, offset somewhat by higher interest expense
related to increased short-term debt.
Liquidity and Sources of Capital
The EUA's system's need for permanent capital is primarily
related to investments in facilities required to meet the needs of
its existing and future customers.
Traditionally, cash construction requirements not met with
internally generated funds are financed through short-term
borrowings which are ultimately funded with permanent capital. At
September 30, 1996, EUA System companies maintained short-term
lines of credit with various banks aggregating approximately $150
million.
Outstanding short-term debt at September 30, 1996 and December
31, 1995 by Business Unit was as follows (000's):
September 30, 1996 December 31, 1995
Core Electric Business $ 0 $ 6,761
Energy Related Business 27,237 14,421
Corporate 25,334 18,358
Consolidated $52,571 $39,540
======= =======
For the nine months ended September 30, 1996 internally
generated funds available after the payment of dividends amounted
to approximately $52.9 million while the EUA System's cash
construction requirements amounted to approximately $49.7 million
for the same period. Various laws, regulations and contract
provisions limit the use of EUA's internally generated funds such
that the funds generated by one subsidiary are not generally
available to fund the operations of another subsidiary.
Electric Utility Industry Restructuring
The electric industry is in a period of transition from a
traditional rate regulated environment to a competitive
marketplace. While competition in the wholesale electric market
is not new, electric utilities are facing impending competition in
the retail sector.
On March 5, 1996 the Rhode Island Public Utility Commission
(RIPUC) required electric utilities subject to their jurisdiction
to file electric industry restructuring plans. On April 19, 1996
both Blackstone and Newport filed a restructuring plan called
"Choice and Competition", described below. Hearings on the
restructuring plans submitted to the RIPUC were to have started on
August 12, 1996. In view of the restructuring legislation
(described below) passed into law on August 7, 1996, however, the
RIPUC terminated its restructuring proceedings.
On August 7, 1996 the Governor of Rhode Island signed into law
the Utility Restructuring Act of 1996 (URA). The URA provides for
customer choice of electricity supplier commencing July 1, 1997
for large manufacturing customers, certain new commercial and
industrial customers, and State of Rhode Island accounts. Load,
accounting for no more than 10% of total electric distribution
company's kWh sales is to be released to retail access under this
provision. An additional 10% of kWh sales is to be released to
retail access by permitting municipal and smaller manufacturers to
choose an electricity supplier commencing January 1, 1998. By
July 1, 1998 or sooner, all customers will have retail access.
This legislation provides for recovery of "stranded costs" through
a non-by-passable transition charge initially set at 2.8 cents per
kWh. The transition charge covers costs of regulatory assets;
nuclear decommissioning; above market payments to power suppliers;
and depreciated generation net of its market value. Nuclear
decommissioning costs and above market payments to power suppliers
will be reconciled to actual costs annually and the transition
charge will be spread over the period from July 1, 1997 through
December 31, 2009.
The implementation of the URA will require approvals from
applicable regulatory agencies, including the Federal Energy
Regulatory Commission (FERC), the RIPUC, and the Securities and
Exchange Commission.
EUA believes that the URA settles much of the uncertainty
regarding "stranded cost" recovery related to serving the
customers of Blackstone and Newport.
In August 1995, the Massachusetts Department of Public
Utilities (MDPU) issued an order enumerating principles that
describe the key characteristics of a restructured electric
industry and provides for, among other things, customer choice of
electric service providers, services, pricing options and payment
terms, an opportunity for customers to share in the benefits of
increased competition, full and fair competition in the generation
markets and incentive regulation for distribution services where
regulation will still exist. This order sets out principles for
the transition from a regulated to a competitive industry
structure and identifies conditions for the transition process
which will require investor-owned utilities to unbundle rates,
provide consumers with accurate price signals and allow customers
choice of generation services. The order also provides, in
principle, for the recovery of net, non-mitigable stranded costs
by investor-owned utilities resulting from the industry
restructuring.
Each Massachusetts investor-owned utility is required to file
restructuring proposals for moving from the current regulated
industry structure to a competitive generation market. An initial
group of utilities was required to file their proposals in
February 1996. The second group is required to file within three
months of the MDPU's orders on the first group of submissions.
Eastern Edison Company filed its proposal, "Choice and
Competition" (see below) with the first group of proposals. On
March 15, 1996, the MDPU issued a Notice of Inquiry (NOI)
Rulemaking on electric industry restructuring. The NOI
incorporated by reference the restructuring proposals previously
submitted pursuant to the MDPU's earlier order. In its NOI order
the MDPU indicated that it planned to issue draft rules to provide
more specific guidance on the framework of a restructured electric
industry.
On May 1, 1996 the MDPU issued its proposed rules for the
restructuring of the electric industry. The MDPU stated the rules
are intended to reduce electricity costs over time and provide
broad customer choice of electric supplier promoting full and fair
competition in the generation of electricity. These proposed
rules, which amplify the principles set forth in the August 1995
order, were issued for public comment and hearing. Final rules
were originally scheduled to be issued in September 1996. On
August 9, 1996 the MDPU issued a notice extending the issuance
date of the final rules. The MDPU goal is to issue final rules by
the end of the calendar year 1996. The May 1st proposed rules
provide for, among other things:
- an independent system operator of the regional transmission
system in New England operating within established
reliability standards and a power exchange which would
facilitate a short-term pool for energy transactions;
- functional separation of electric companies into
generation, transmission and distribution corporate
entities;
- a "reasonable" opportunity for recovery of net, non-
mitigable stranded costs periodically subject to some
degree of reconciliation;
- a price cap system for performance based regulation of
electric distribution companies;
- distribution company obligation to provide electric
distribution service to all customers within its service
territory;
- environmental protection and support for renewable energy
resources and energy efficiency;
- implementation of unbundled rates beginning January 1, 1997
and a competitive generation market by January 1, 1998;
EUA participated in hearings held during June and July of
1996, and on August 2, 1996, filed written comments addressing
restructuring issues. In its notice of August 9, 1996, the MDPU
encouraged stakeholders to work together toward consensual
resolution of restructuring issues. EUA is currently engaged in
settlement negotiations. One Massachusetts electric utility
company has submitted its offer of settlement on restructuring
issues to the MDPU. EUA cannot predict the ultimate outcome of
the restructuring process.
In January 1996, EUA unveiled its preliminary proposal for a
restructured electric utility industry called "Choice and
Competition" and began discussions with collaborative groups in
both Rhode Island and Massachusetts consisting of other utilities,
industrial users, environmental groups, governmental agencies and
consumer advocates. The plan proposed, among other things: choice
of power supplier by all customers as early as January 1998; open
access transmission services; performance based rates for electric
distribution services; all utility generation competing for power
sales; and a transition charge allowing regional utilities the
opportunity to recover, among other things, the costs of past
commitments to nuclear and independent power. The keystone to
"Choice and Competition" was the adoption of common electric
utility restructuring implementation for the New England states
operating with the region's power pool. As different
restructuring initiatives surfaced from state regulatory agencies
and state legislatures, it became apparent that a New England
region-wide approach to restructuring would be unlikely. Thus,
major elements of the "Choice and Competition" proposal have been
substantially modified to reflect that state by state, rather than
regional, plans will be adopted.
Historically, electric rates have been designed to recover a
utility's full costs of providing electric service including
recovery of investment in plant assets. Also, in a regulated
environment, electric utilities are subject to certain accounting
rules that are not applicable to other industries. These
accounting rules allow regulated companies, in appropriate
circumstances, to establish regulatory assets and liabilities,
which defer the current financial impact of certain costs that are
expected to be recovered in future rates. EUA believes that its
Core Electric operations continue to meet the criteria established
in these accounting standards.
However, the potential exists that the final outcome of state
and federal agency determinations could require EUA to no longer
follow these accounting rules. Current or future regulatory
proposals regarding the electric delivery business and the
recovery of EUA's utility plant, stranded investment, and
regulatory assets could trigger the discontinuance of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" (FAS71). Should it be required to
discontinue the application of FAS71, EUA would be required to
take an immediate write down of the affected assets in accordance
with FAS101, "Accounting for the Discontinuation of Application of
FAS71".
In addition, if legislative or regulatory changes and/or
competition result in electric rates which do not fully recover
the company's costs, a write-down of plant assets could be
required pursuant to Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (FAS121) issued in March 1995,
effective for fiscal year 1996.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 15, 1995, Eastern Edison exercised its right to
terminate a Power Purchase Agreement (the PPA) entered into with
the Meridian Middleboro Limited Partnership (MMLP) and a related
entity on September 20, 1993. In February and May of 1996, MMLP
made demand for over $25 million under the termination provision
of the PPA. On June 17, 1996, Eastern Edison responded to MMLP's
demand stating that only approximately $170,000 was due under the
termination provision. On July 18, 1996, Eastern Edison filed a
declaratory judgement action in Suffolk Superior Court in Boston,
Massachusetts against MMLP seeking a declaration of the rights of
the parties under the PPA. MMLP's response to the complaint,
filed on August 8, 1996, included counter claims in excess of $20
million and a request for treble damages. In response to the
counter claim, Eastern Edison paid MMLP $191,828 as the amount
Eastern Edison considered to have been owed to MMLP. The Company
intends to vigorously defend itself from the counter claims. The
Company cannot determine the outcome of this proceeding at this
time.
Item 3. Defaults Upon Senior Securities
As a result of the June 1996 $5.9 million charge to earnings
and lower than anticipated sales, EUA Cogenex was out of
compliance with the interest coverage covenant contained in
certain of its unsecured note agreements and therefore EUA Cogenex
was in default under said note agreements. EUA Cogenex has
reached agreement with lenders to modify the interest coverage
covenant contained in these note agreements through June 30, 1997
and to waive the default created by the June 1996 charge.
Item 5. Other Information
On April 24, 1996, the FERC issued orders on its March 24,
1995 Notice of Proposed Rulemaking (NOPR). FERC's purpose in
proposing the new rules was to encourage competition in the bulk
power market. The FERC's April 24th actions include:
- order No. 888, a final rule requiring open access
transmission and requiring all public utilities that own,
operate or control interstate transmission to file
tariffs that offer others the same transmission services
they provide themselves, under comparable terms and
conditions. Utilities must take transmission service for
their own wholesale transactions under the terms and
conditions of the tariff;
- recovery of prudently incurred stranded costs by public
utilities and transmitting utilities;
- order No. 889, a final rule requiring public utilities to
implement standards of conduct and an Open Access Same-time
Information System (OASIS). Utilities must obtain
information about their transmission the same way as
their competitors through the OASIS;
- a Notice of Proposed Rulemaking (NOPR) requesting comment
on replacing the single tariff contained in the final
open access rule with a capacity reservation tariff that
would reveal how much transmission is available at any
given time.
Open-access transmission tariffs for point-to-point and
network service filed with FERC by Montaup in February 1996 have
been approved and became effective April 21, 1996 for a period of
at least one year. These tariffs are in compliance with FERC's
April 24th rulings. EUA remains committed to achieving a fair and
equitable transition to a competitive electric utility
marketplace.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
- None filed in the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Eastern Utilities Associates
(Registrant)
Date: November 13, 1996 /s/ Clifford J. Hebert, Jr.
Clifford J. Hebert, Jr., Treasurer
(on behalf of the Registrant and
as Principal Financial Officer)